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ISO Future Corner of the Business
Controlling the Supply Chain
In almost every industry, the business model has swung from
horizontal to vertical integration. During the late 19th century and
part of the 20th, steel manufacturers controlled iron ore mines, or
transportation systems, as well as the steel-making process. Later,
the pendulum swung to more horizontal integration, with steel
makers buying ore from mining companies and contracting for
other services.
The same swing is occurring in information technology. Vertical
integration is a growing force. Apple’s profitability is, among
other things, a function of its willingness to manage and control
its entire supply chain and, just like those steel makers, right down
to the mine, sourcing aluminum for the iPhone’s case. Apple controls
software distribution through the App Store, controls payments
through iTunes, and writes the operating system software
its hardware runs on. That’s vertical integration.
Evolving beyond the VAR model—where an independent distributor
assembles, sells, and services a handful of major components—vertical
integration for retailer payments means going
beyond just payments. These technology-driven attributes are not
lost on those with a stake in the payments business. Chase Paymentech
is backing GoPago with aggressive pricing that enables
GoPago, to some extent, to offer its service, and included bundled
hardware, at a flat transaction rate only marginally higher than
that of Square.
It wouldn’t be a big step for an acquiring processor to acquire a
solution like GoPago. It would certainly be an increase in the vertical
integration, and consolidation, of the merchant services industry.
Of course, these Internet-based approaches are vulnerable
competitively when it comes to customer service. A direct sales
model cuts a major cost center but customer service and training
capability are necessary, especially in this era of high business
failure and low rates of business formation. Very few “green field”
opportunities exist. Existing data needs to be moved to the new
scheme—rarely a hands-off exercise. Clerk training cannot always
be accomplished by snippets of video (although it is remarkable
how well that works).
In other words, as complexity increases, the need for customer
service and training increases—no matter how elegant a tabletbased
touchscreen may be. But if a solution is well designed,
complexity falls away and usage increases. Just look at Apple and
consider what Square is trying to do.
MSPs who take the admonition to “simplify, simplify, simplify”
to heart and to their merchant customers will win. The focus has
to be on delivering services that improve the merchant’s top and
bottom lines. Payments acceptance alone is no longer a function
that can do both. There has to be more to the MSP value proposition.
Taking a vertical integration approach is one way to expand
that value. TT
George Peabody is director, emerging technologies
advisory service, for Mercator Advisory Group in
Maynard, Massachusetts. Reach him at gpeabody@
mercatoradvisorygroup.com.
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10 October 2012 | Transaction trends